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I don’t understand the kaplan answer to this question, please can you explain?
Betis Limited are considering changing the way it is structured by asking it’s employed staff to become freelance. Employees are currently paid a fixed salary of $240,000 per annum, but would instead be paid $200 per working day. On a typical day, staff can produce 40 units. Other fixed costs are $400,000 per annum. The selling price of a unit is $60 and material costs are $20 per unit.
What would be the effect of the change on the breakeven point of the business and the level of operating risk?
The answer section says the answer is B – The breakeven point reduced by 4,571 units and the operating risk goes down. I don’t understand the new breakeven point calculation or where the $5 reduction in new contribution has been calculated from. These are the workings given:
Current breakeven is $640,000/40 = 16,000 units
New breakeven point is $400,000/35 = 11,429 units
Change in level of breakeven is 16,000 – 11,429 = 4,571 units
Current contribution is $60 – $20 = $40
New contribution is $60 – $20 – $5 = $35
Is the $5 reduction in contribution being calculated from $200 per day/40 units = $5 and is it a reduction in contribution because the freelance daily rate isn’t classed as a fixed cost in the same way as the per annum salary?
Thank you in advance.
If the employees become freelance, they become a variable cost instead of a fixed cost. So the fixed costs reduce from 640,000 to 400,000.
The variable costs will increase by $5 per unit because they are paid $200 a day to produce 40 units a day, and so the contribution will reduce by $5 per unit.